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1
Project Finance
and Contract
Pricing
Project Finance
and Contract
Pricing
13/11/2014 Emad Elbeltagi 2
Project Finance & Contract PricingProject Finance & Contract Pricing
Contract Cash Flow
How much is the total cost?
How to arrange for financing?
Cash Flow = Cash In –Cash Out
= Income – Expense
= Revenue - Cost
Contract Cash Flow
How much is the total cost?
How to arrange for financing?
Cash Flow = Cash In –Cash Out
= Income – Expense
= Revenue - Cost
2
13/11/2014 Emad Elbeltagi 3
Project Finance & Contract PricingProject Finance & Contract Pricing
Project Expenses
� The project cost types:
� Fixed cost (equipment,…)
� Time-related cost (distributed over the duration of an activity, e.g.,
salaries, …)
� Quantity (Production)-related costs (costs per unit of materials or
unit of resource usage)
� When these costs are paid, it is named expenses
Project Expenses
� The project cost types:
� Fixed cost (equipment,…)
� Time-related cost (distributed over the duration of an activity, e.g.,
salaries, …)
� Quantity (Production)-related costs (costs per unit of materials or
unit of resource usage)
� When these costs are paid, it is named expenses
13/11/2014 Emad Elbeltagi 4
Project Expenses (Smooth curve)Project Expenses (Smooth curve)
Project Finance & Contract PricingProject Finance & Contract Pricing
0
100
200
300
400
500
600
700
0 2 4 6 8 10
Cost
Expense
LE x1000
Time
3
13/11/2014 Emad Elbeltagi 5
Project Finance & Contract
Pricing
Project Finance & Contract
PricingProject Expenses
� The project S-Curve:
Project Expenses
� The project S-Curve:
Cost (LE)
Time
13/11/2014 Emad Elbeltagi 6
Project Finance & Contract PricingProject Finance & Contract Pricing
Project Income
� Project revenue is the summation of the activities prices
� Represents the payment made by the owner to the contractor
� Mostly, the contractor receive his payments after one month from
submitting his/her invoice
� Retainage of 5 or 10 to ensure that no problems will arise during
construction
� When the contractor receive his/her payments, it is called
Income
Project Income
� Project revenue is the summation of the activities prices
� Represents the payment made by the owner to the contractor
� Mostly, the contractor receive his payments after one month from
submitting his/her invoice
� Retainage of 5 or 10 to ensure that no problems will arise during
construction
� When the contractor receive his/her payments, it is called
Income
4
13/11/2014 Emad Elbeltagi 7
Project Income (Stepped curve)Project Income (Stepped curve)
Project Finance & Contract PricingProject Finance & Contract Pricing
Time0
100
200
300
400
500
600
700
800
0 2 4 6 8 10
Income
Revenue
LE x1000
13/11/2014 Emad Elbeltagi 8
Project Finance & Contract PricingProject Finance & Contract Pricing
Example
� Consider the construction operation of a foundation activity
� Activity duration 8 weeks
� Labor cost of LE 1600 paid weekly
� Equipment cost of LE 4000 paid weekly after 2-month credit facility
� Material cost of LE 800 paid weekly after 3-month credit facility
� Subcontractor cost of LE 2400 paid weekly after 1-month credit
facility
� When each payment by the contractor is due and how much?
Example
� Consider the construction operation of a foundation activity
� Activity duration 8 weeks
� Labor cost of LE 1600 paid weekly
� Equipment cost of LE 4000 paid weekly after 2-month credit facility
� Material cost of LE 800 paid weekly after 3-month credit facility
� Subcontractor cost of LE 2400 paid weekly after 1-month credit
facility
� When each payment by the contractor is due and how much?
5
13/11/2014 Emad Elbeltagi 9
Project Finance & Contract PricingProject Finance & Contract Pricing
Week 1 2 3 4 5 6 7 8
Payments 1100 1100 1100 1100 1100 1100 1100 1100
Total 1100 2200 3300 4400 5500 6600 7700 8800
Example
� Activity total cost = LE 8800
Example
� Activity total cost = LE 8800
13/11/2014 Emad Elbeltagi 10
ExpensesExpenses
Project Finance & Contract PricingProject Finance & Contract Pricing
wk 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
L
E
M
S
T
- 200 200 200 200 200 200 200 200
- - - - - - - - 500 500 500 500 500 500 500 500
- - - - - - - - - - - - 100 100 100 100 100 100 100 100
- - - - 300 300 300 300 300 300 300 300
- 200 200 200 500 500 500 500 1000 800 800 800 600 600 600 600 100 100 100 100
6
13/11/2014 Emad Elbeltagi 11
Contract Cash FlowContract Cash Flow
Project Finance & Contract PricingProject Finance & Contract Pricing
Cost (LE)
Expense
Profile
Month
Income
Profile
Retainage
Cash out-of-flow
13/11/2014 Emad Elbeltagi 12
Contract Cash Flow - Admeasurements contractContract Cash Flow - Admeasurements contract
Project Finance & Contract PricingProject Finance & Contract Pricing
Cumulative cost (LE)
1 2 3 4 5 6 7 8
Time
Income
Overdraft
Expense
7
13/11/2014 Emad Elbeltagi 13
Contract Cash Flow - Admeasurements contract
with advanced payment
Contract Cash Flow - Admeasurements contract
with advanced payment
Project Finance & Contract PricingProject Finance & Contract Pricing
Income
Cumulative Cost (LE)
0 1 2 3 4 5 6 7 8
Time
Expense
Advanced
payment
13/11/2014 Emad Elbeltagi 14
Contract Cash Flow – Lump sum contract with three
payments
Contract Cash Flow – Lump sum contract with three
payments
Project Finance & Contract PricingProject Finance & Contract Pricing
Cumulative Cost (LE)
0 1 2 3 4 5 6 7 8Time
Income
Expense
8
13/11/2014 Emad Elbeltagi 15
Project Finance & Contract PricingProject Finance & Contract Pricing
Variables needed to calculate cash flow
� The project bar chart (project schedule)
� Activities’ direct and indirect cost
� Contractor method of paying his/her expenses
� Contractor’s markup
� Retention amount and its payback time
� Time of payment delay by owner
� Advanced or mobilization payment
Variables needed to calculate cash flow
� The project bar chart (project schedule)
� Activities’ direct and indirect cost
� Contractor method of paying his/her expenses
� Contractor’s markup
� Retention amount and its payback time
� Time of payment delay by owner
� Advanced or mobilization payment
Contract Cash FlowContract Cash Flow
13/11/2014 Emad Elbeltagi 16
Project Finance & Contract PricingProject Finance & Contract Pricing
Procedure to calculate cash flow
� The project bar chart (project schedule)
� Perform project schedule
� Draw bar chart based on early or late timings
� Calculate the cost per time period
� Calculate the cumulative cost
� Adjust the cost to produce the expenses
� Calculate cumulative revenue: revenue = cost x (1 + markup)
� Adjust the revenue to produce the income
� Calculate the cash flow (cash flow = income – expense).
Procedure to calculate cash flow
� The project bar chart (project schedule)
� Perform project schedule
� Draw bar chart based on early or late timings
� Calculate the cost per time period
� Calculate the cumulative cost
� Adjust the cost to produce the expenses
� Calculate cumulative revenue: revenue = cost x (1 + markup)
� Adjust the revenue to produce the income
� Calculate the cash flow (cash flow = income – expense).
Contract Cash FlowContract Cash Flow
9
13/11/2014 Emad Elbeltagi 17
Project Finance & Contract PricingProject Finance & Contract Pricing
ExampleExample
0 0
6
1
2
4
3
65
78
9
A(4)
B(6)
C(2)
D(8)
F(10)
G(16)
J(6)
E(4)
H(8)
K(10)
I(6)
4
6
2 22
16
12
24 32 3226
22
22
18
16
14
13/11/2014 Emad Elbeltagi 18
Project Finance & Contract PricingProject Finance & Contract Pricing
Example data: Mark up = 5%Example data: Mark up = 5%
ExampleExample
ActivityDuration
(day)
Total Cost (LE x
1000)
Total Revenue (LE x
1000)
A
B
C
D
E
F
G
H
I
J
K
4
6
2
8
4
10
16
8
6
6
10
04.00
12.00
04.00
16.00
20.00
20.00
16.00
24.00
12.00
12.00
10.00
04.20
12.60
04.20
16.80
21.00
21.00
16.80
25.20
12.60
12.60
10.50
10
13/11/2014 Emad Elbeltagi 19
Project Finance & Contract PricingProject Finance & Contract Pricing
Example data:
� Contractor expenses will be paid immediately
� Retention = 10% will be paid with the last payment
� Calculations made every 8 days
� Owner payment will be delayed one period
� First invoice after at the end of the period
� No advanced payment
Example data:
� Contractor expenses will be paid immediately
� Retention = 10% will be paid with the last payment
� Calculations made every 8 days
� Owner payment will be delayed one period
� First invoice after at the end of the period
� No advanced payment
ExampleExample
13/11/2014 Emad Elbeltagi 20
Project Finance & Contract PricingProject Finance & Contract Pricing
ExampleExampleTime (days)
1000/day
2000/day000/day
2000/day
2000/day
5000/day
2000/day
1000/day
3000/day
2000/day
2000/day
1000/day
11
13/11/2014 Emad Elbeltagi 21
Project Finance & Contract PricingProject Finance & Contract Pricing
ExampleExample1. Cost/2 days x
LE1000 10 10 12 14 10 10 16 16 8 8 8 8 6 6 6 2 - - - -
2. Cost each period x
LE100046 52 32 20 -
3. Cumulative cost x
LE100046 98 130 150 150
4. Cumulative
Expense x 100046 98 130 150 150
5. Revenue = row 3 x
1.0548.3 54.6 33.6 21 -
6. Revenue - retention
= row 5 x 0.943.47 49.14 30.24 18.90 -
7. Retention x LE1000 - - - - 15.75
8. Cumulative revenue
x LE100043.47 92.61 122.85 141.75 157.50
9. Cumulative income
x LE1000- 43.47 92.61 122.85 157.50
10. Cumulative cash
flow x LE1000 =
row 9 – row 4
-46 -98/-54.53 -86.53/-37.39 -57.39/-27.15 -27.15/+7.5
13/11/2014 Emad Elbeltagi 22
Project Finance & Contract PricingProject Finance & Contract Pricing
ExampleExample
0
10
20
30
40
50
60
70
80
90
100
110
120
130
140
150
160
0 1 2 3 4 5 6
Time (period)
LE
x1
00
0
Area = LE 10,000
x 1 period (8-days)
12
13/11/2014 Emad Elbeltagi 23
Project Finance & Contract PricingProject Finance & Contract Pricing
ExampleExample
-110
-90
-70
-50
-30
-10
10
30
0 1 2 3 4 5 6
Time (period)
LE
x 1
00
0
13/11/2014 Emad Elbeltagi 24
Project Finance & Contract PricingProject Finance & Contract Pricing
� Loading of rates
� Adjustment of work schedule to late start timing
� Reduction of delays in receiving revenues
� Asking for advanced or mobilization payment
� Increasing the mark up and reducing the retention
� Adjust the timing of delivery of large material orders
� Delay in paying labor wages, equipment, material
� Loading of rates
� Adjustment of work schedule to late start timing
� Reduction of delays in receiving revenues
� Asking for advanced or mobilization payment
� Increasing the mark up and reducing the retention
� Adjust the timing of delivery of large material orders
� Delay in paying labor wages, equipment, material
Minimizing Contract Negative Cash FlowMinimizing Contract Negative Cash Flow
13
13/11/2014 Emad Elbeltagi 25
Project Finance & Contract PricingProject Finance & Contract Pricing
� 24 unit areas, interest rate 1% per period
� Cost = 24 x 10000 x 0.01 = LE 2400
� 24 unit areas, interest rate 1% per period
� Cost = 24 x 10000 x 0.01 = LE 2400
Cost of BorrowingCost of Borrowing
0
10
20
30
40
50
60
70
80
90
100
110
120
130
140
150
160
0 1 2 3 4 5 6
Time (period)
LE
x1
00
0Area = LE 10,000
x 1 period (8-
days)
13/11/2014 Emad Elbeltagi 26
Project Finance & Contract PricingProject Finance & Contract Pricing
� Time scale is much longer spans the whole life of a project
� Feasibility studies
� Execution
� Operation
� Time scale is much longer spans the whole life of a project
� Feasibility studies
� Execution
� Operation
Project Cash FlowProject Cash Flow
Profitability indicators
� Payback period
� Maximum capital – maximum negative cash
� Profit
Profitability indicators
� Payback period
� Maximum capital – maximum negative cash
� Profit
14
13/11/2014 Emad Elbeltagi 27
Project Finance & Contract PricingProject Finance & Contract Pricing
Project Cash FlowProject Cash Flow
Payback
period
Maximum
capital
Profit
Cumulative
cash flow
Project
duration
13/11/2014 Emad Elbeltagi 28
Project Finance & Contract PricingProject Finance & Contract Pricing
Year 1 2 3 4 5 6 7 8
Project A (LE x 1000)
Project B (LE x1000)
-10
-30
-50
-110
-80
-80
-60
-30
0
-20
20
0
35
40
65
80
Project Cash Flow: ExampleProject Cash Flow: Example
� Project net cash flow� Project net cash flow
� Project cumulative cash flow� Project cumulative cash flow
Year 1 2 3 4 5 6 7 8
Project A (LE x 1000)
Project B (LE x 1000)
-10
-30
-40
-80
-30
30
20
50
60
10
20
20
15
40
30
40
15
13/11/2014 Emad Elbeltagi 29
Project Finance & Contract PricingProject Finance & Contract Pricing
Project Cash Flow: ExampleProject Cash Flow: Example
65
80
-110
-80
-150
-100
-50
0
50
100
0 2 4 6 8
Project AProject A
Project BProject B
13/11/2014 Emad Elbeltagi 30
Project Finance & Contract PricingProject Finance & Contract Pricing
Present value (PV)
� Current values of money
� Discounted value due to inflation
� Change in currency power purchasing
Present value (PV)
� Current values of money
� Discounted value due to inflation
� Change in currency power purchasing
Discounted Cash FlowDiscounted Cash Flow
C = P x (1+r) C = P x (1+r) C = P x (1+r) (1 + r)C = P x (1+r) (1 + r)C = P x (1+r) (1 + r) (1 + r)C = P x (1+r) (1 + r) (1 + r)C = P x (1+r) nC = P x (1+r) n
P = C / (1+r) nP = C / (1+r) n
Net present value (NPV)= PV income- PV expenseNet present value (NPV)= PV income- PV expense
16
13/11/2014 Emad Elbeltagi 31
Project Finance & Contract PricingProject Finance & Contract Pricing
Net Present ValueNet Present Value
Year 0 1 2 3 4 5
Project A (LE )
Project B (LE )
-1000
-1000
500
100
400
200
200
200
200
400
100
700
� Project net cash flow� Project net cash flow
� Which project would you prefer?
� Interest rate (discount rate) = 10% /year
� Which project would you prefer?
� Interest rate (discount rate) = 10% /year
13/11/2014 Emad Elbeltagi 32
Project Finance & Contract PricingProject Finance & Contract Pricing
Net Present ValueNet Present Value
� Project A� Project A
� Project B� Project B
17
13/11/2014 Emad Elbeltagi 33
Project Finance & Contract PricingProject Finance & Contract Pricing
� The least discount rate (investment rate) that
acceptable by the contractor or greater than the
return on capital
� It is the discount rate with zero NPV
� The least discount rate (investment rate) that
acceptable by the contractor or greater than the
return on capital
� It is the discount rate with zero NPV
Internal rate of return (IRR)Internal rate of return (IRR)
13/11/2014 Emad Elbeltagi 34
Project Finance & Contract PricingProject Finance & Contract Pricing
� Same previous example� Same previous example
Internal rate of return: ExampleInternal rate of return: Example
� Project A� Project A
� Project B� Project B
18
13/11/2014 Emad Elbeltagi 35
Project Finance & Contract PricingProject Finance & Contract Pricing
Finalizing Bid PriceFinalizing Bid Price
Price
Direct costIndirect
cost
CostMarkup
ProfitRisk
allowance
Financial
charge
13/11/2014 Emad Elbeltagi 36
Project Finance & Contract PricingProject Finance & Contract Pricing
Indirect CostIndirect Cost
Project Overheads (Site)
� Does not apply to a specific activity
� Cost of site utilities, supervisors, workshop,…
� A detailed analysis can be carried out
� Generally assumed 5 – 15 % of direct cots
Project Overheads (Site)
� Does not apply to a specific activity
� Cost of site utilities, supervisors, workshop,…
� A detailed analysis can be carried out
� Generally assumed 5 – 15 % of direct cots
19
13/11/2014 Emad Elbeltagi 37
Project Finance & Contract PricingProject Finance & Contract Pricing
Indirect CostIndirect Cost
General Overheads (Head-office)
� Does not apply to a specific project
� Cost of head-office, managers, estimators,…
� Generally assumed 2 – 5 % of direct cots
� For a specific project: Project direct cost x general
overhead of the company in a year/ Expected sum of
direct costs of all projects during the year
General Overheads (Head-office)
� Does not apply to a specific project
� Cost of head-office, managers, estimators,…
� Generally assumed 2 – 5 % of direct cots
� For a specific project: Project direct cost x general
overhead of the company in a year/ Expected sum of
direct costs of all projects during the year
13/11/2014 Emad Elbeltagi 38
Project Finance & Contract PricingProject Finance & Contract Pricing
Profit MarginProfit Margin
� The contactors’ competition to win a project
� A contractor’s desirability for work
� Volume of work that the contractor has at a certain
time
� Size of the project and it complexity
� Identity of the client and the engineer
� The contactors’ competition to win a project
� A contractor’s desirability for work
� Volume of work that the contractor has at a certain
time
� Size of the project and it complexity
� Identity of the client and the engineer
20
13/11/2014 Emad Elbeltagi 39
Project Finance & Contract PricingProject Finance & Contract Pricing
Risk ManagementRisk Management
� Uncertainty and risks usually leads to project
completion delays and cost overruns
� Process: Identification of risks
� Responses to avoid, reduce, or transfer risk
� Analysis and assessment of residual risks after the risk
responses
� Adding time and /or cost contingency for residual risks
in the project estimates
� Uncertainty and risks usually leads to project
completion delays and cost overruns
� Process: Identification of risks
� Responses to avoid, reduce, or transfer risk
� Analysis and assessment of residual risks after the risk
responses
� Adding time and /or cost contingency for residual risks
in the project estimates
13/11/2014 Emad Elbeltagi 40
Project Finance & Contract PricingProject Finance & Contract Pricing
Risk ManagementRisk Management
Generally the risk should be carried out by the party
who is best able to define it. If there is any doubt,
it should be carried out by the client. This is
because, it is better for the client to pay for what
does happen rather than for what the contractor
thought might happen
Generally the risk should be carried out by the party
who is best able to define it. If there is any doubt,
it should be carried out by the client. This is
because, it is better for the client to pay for what
does happen rather than for what the contractor
thought might happen
21
13/11/2014 Emad Elbeltagi 41
Project Finance & Contract PricingProject Finance & Contract Pricing
Risk ManagementRisk Management
Risk Identification
� Risk is the possibility of undesirable extra cost or delay
due to factors having uncertain future outcome
� Material may not be available prior to construction
thus delay the project
� Risks defined through: check lists, experts opinions,
comparisons with other
Risk Identification
� Risk is the possibility of undesirable extra cost or delay
due to factors having uncertain future outcome
� Material may not be available prior to construction
thus delay the project
� Risks defined through: check lists, experts opinions,
comparisons with other
13/11/2014 Emad Elbeltagi 42
Project Finance & Contract PricingProject Finance & Contract Pricing
Risk Management: identificationRisk Management: identification
Administrative
� Delay in possesses of site
� Limited working hours
� Limited access to the site
� Troubles with public services
Administrative
� Delay in possesses of site
� Limited working hours
� Limited access to the site
� Troubles with public services
Logistical
� Shortage or late supply of different resources
� Site remoteness problems
Logistical
� Shortage or late supply of different resources
� Site remoteness problems
22
13/11/2014 Emad Elbeltagi 43
Project Finance & Contract PricingProject Finance & Contract Pricing
Risk Management: identificationRisk Management: identification
Physical
� Periods of high temperature
� Placing fill in dry season
� Diverting water canals in time of low flow
Physical
� Periods of high temperature
� Placing fill in dry season
� Diverting water canals in time of low flow
Construction
� limited work space
� Changes in soil condition
� Availability of skilled labor
� Equipment breakdown
Construction
� limited work space
� Changes in soil condition
� Availability of skilled labor
� Equipment breakdown
13/11/2014 Emad Elbeltagi 44
Project Finance & Contract PricingProject Finance & Contract Pricing
Risk Management: identificationRisk Management: identification
Design
� Design incomplete
� Design changes
� Design errors
Design
� Design incomplete
� Design changes
� Design errors
Financial
� Inflation
� New restrictions applied on importing
� Exchange rate fluctuation
� Availability of funds
Financial
� Inflation
� New restrictions applied on importing
� Exchange rate fluctuation
� Availability of funds
23
13/11/2014 Emad Elbeltagi 45
Project Finance & Contract PricingProject Finance & Contract Pricing
Risk Management: identificationRisk Management: identification
Political
� Change of local laws and regulations
� Necessity to use local resources
� Effect of wars and revolutions
Political
� Change of local laws and regulations
� Necessity to use local resources
� Effect of wars and revolutions
Disasters
� Floods and storms
� Earthquakes
� Accidents
� Diseases
Disasters
� Floods and storms
� Earthquakes
� Accidents
� Diseases
13/11/2014 Emad Elbeltagi 46
Project Finance & Contract PricingProject Finance & Contract Pricing
Risk Management: ResponseRisk Management: Response
� Using construction methods with high success
� Using extra resources
� Securing alternative suppliers
� Providing temporary roads
� Allowing free housing near construction
� Locating site facilities away of the working space
� Assuming realistic reduced resources output
� Using equipments with available spare parts
� Providing facilities for mechanical maintenance
� Using construction methods with high success
� Using extra resources
� Securing alternative suppliers
� Providing temporary roads
� Allowing free housing near construction
� Locating site facilities away of the working space
� Assuming realistic reduced resources output
� Using equipments with available spare parts
� Providing facilities for mechanical maintenance
24
13/11/2014 Emad Elbeltagi 47
Project Finance & Contract PricingProject Finance & Contract Pricing
Risk Management: ResponseRisk Management: Response
Time contingency
� extra time that added to the contract time to offset
the effect of risks
Time contingency
� extra time that added to the contract time to offset
the effect of risks
� A general allowance is added to the overall contract
duration, e.g., weather conditions
� A general allowance is added to the overall contract
duration, e.g., weather conditions
� Allowance is added to a particular activity affected by
the risk
� Allowance is added to a particular activity affected by
the risk
13/11/2014 Emad Elbeltagi 48
Project Finance & Contract PricingProject Finance & Contract Pricing
Risk Management: ResponseRisk Management: Response
Cost contingency
� extra cost is added to the estimate and the contract
price
Cost contingency
� extra cost is added to the estimate and the contract
price
� Based on the experience, a fixed percentage is added
� This might not be accurate
� Based on the experience, a fixed percentage is added
� This might not be accurate
� A detailed risk analysis may be done to determine the
suitable contingency
� A detailed risk analysis may be done to determine the
suitable contingency
25
13/11/2014 Emad Elbeltagi 49
Project Finance & Contract PricingProject Finance & Contract Pricing
Pricing PolicyPricing Policy
� direct cost are associated directly to contract activities
� Indirect costs and markup are related to the whole
contract
� Pricing policy is the method by which the indirect
costs and markup will be distributed among the items
of the bill of quantities
� direct cost are associated directly to contract activities
� Indirect costs and markup are related to the whole
contract
� Pricing policy is the method by which the indirect
costs and markup will be distributed among the items
of the bill of quantities
13/11/2014 Emad Elbeltagi 50
Project Finance & Contract PricingProject Finance & Contract Pricing
Pricing PolicyPricing Policy
Balanced bid (Straight forward)Balanced bid (Straight forward)
The share of specific item =
x (total indirect cost + markup)Direct cost of this item
Total contract direct cost
26
13/11/2014 Emad Elbeltagi 51
Project Finance & Contract PricingProject Finance & Contract Pricing
Pricing Policy: Balanced BidPricing Policy: Balanced Bid
Example
� Contract price 3,500,000
� Direct cost 2,800,000
� If the direct cost of an activity is 400,000
� Determine the price of that activity
Example
� Contract price 3,500,000
� Direct cost 2,800,000
� If the direct cost of an activity is 400,000
� Determine the price of that activity
13/11/2014 Emad Elbeltagi 52
Project Finance & Contract PricingProject Finance & Contract Pricing
Pricing Policy: Balanced BidPricing Policy: Balanced Bid
Example
� Bid price = direct cost + indirect cost + markup
� Indirect cost + markup = 3,500,000 - 2,800,000 = LE
700,000
� Indirect cost + markup For the activity =
400,000/2,800,000 x 700,000 = 100,000
� Activity price = 400,000 + 100,000 =500,000
Example
� Bid price = direct cost + indirect cost + markup
� Indirect cost + markup = 3,500,000 - 2,800,000 = LE
700,000
� Indirect cost + markup For the activity =
400,000/2,800,000 x 700,000 = 100,000
� Activity price = 400,000 + 100,000 =500,000
27
13/11/2014 Emad Elbeltagi 53
Project Finance & Contract PricingProject Finance & Contract Pricing
Pricing Policy: Unbalanced BidPricing Policy: Unbalanced Bid
� Called also loading of rates
� Increasing prices for early items in the BOQ
� Increase the cash revenue at the beginning
� Decrease negative cash flow
� May be risky to the owner or the contractor
� Called also loading of rates
� Increasing prices for early items in the BOQ
� Increase the cash revenue at the beginning
� Decrease negative cash flow
� May be risky to the owner or the contractor
13/11/2014 Emad Elbeltagi 54
Project Finance & Contract PricingProject Finance & Contract Pricing
Pricing Policy: Unbalanced BidPricing Policy: Unbalanced Bid
Example : Consider the following projectExample : Consider the following project
Activity QuantityDirect cost
rate
Balanced bid Unbalanced bid
Rate Price Rate Price
A
B
C
D
E
100
100
100
100
100
4
8
16
16
8
5
10
20
20
10
500
1000
2000
2000
1000
6
14
18
18
9
600
1400
1800
1800
900
Tender price 6500 6500
28
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Project Finance & Contract PricingProject Finance & Contract Pricing
Pricing Policy: Unbalanced BidPricing Policy: Unbalanced Bid
Example
� Draw the cash flow curves for both balanced and
unbalanced bids
� Determine the effect of increasing quantity of activity
B by 50%
� Determine the effect of increasing quantity of activity
C by 50%
Example
� Draw the cash flow curves for both balanced and
unbalanced bids
� Determine the effect of increasing quantity of activity
B by 50%
� Determine the effect of increasing quantity of activity
C by 50%
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Project Finance & Contract PricingProject Finance & Contract Pricing
Pricing Policy: Unbalanced BidPricing Policy: Unbalanced Bid
0
1000
2000
3000
4000
5000
6000
7000
0 1 2 3 4 5 6
Time
Pri
ce
Balanced bid
Unbalanced bid
29
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Project Finance & Contract PricingProject Finance & Contract Pricing
Pricing Policy: Unbalanced BidPricing Policy: Unbalanced Bid
Activity QuantityDirect
cost rate
Balanced bid Unbalanced bid
Rate Price Rate Price
A
B
C
D
E
100
150
100
100
100
4
8
16
16
8
5
10
20
20
10
500
1500
2000
2000
1000
6
14
18
18
9
600
2100
1800
1800
900
Example : Effect of Increasing activity B by 50%Example : Effect of Increasing activity B by 50%
Tender Price 7000 7200Tender Price 7000 7200
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Project Finance & Contract PricingProject Finance & Contract Pricing
Pricing Policy: Unbalanced BidPricing Policy: Unbalanced Bid
Example : Effect of Increasing activity C by 50%Example : Effect of Increasing activity C by 50%
Activity QuantityDirect
cost rate
Balanced bid Unbalanced bid
Rate Price Rate Price
A
B
C
D
E
100
100
150
100
100
4
8
16
16
8
5
10
20
20
10
500
1000
3000
2000
1000
6
14
18
18
9
600
1400
2700
1800
900
Tender Price 7500 7400Tender Price 7500 7400
30
13/11/2014 Emad Elbeltagi 59
Project Finance & Contract PricingProject Finance & Contract Pricing
Pricing Policy: Method related chargePricing Policy: Method related charge
� In conventional BOQ, all costs are related to quantity
of work
� Result in financial problems
� Example, site overheads
� Specifying independent items from quantities as
separate items in the BOQ
� These items may be fixed cost or time related
� In conventional BOQ, all costs are related to quantity
of work
� Result in financial problems
� Example, site overheads
� Specifying independent items from quantities as
separate items in the BOQ
� These items may be fixed cost or time related
13/11/2014 Emad Elbeltagi 60
Project Finance & Contract PricingProject Finance & Contract Pricing
Pricing Policy: Method related chargePricing Policy: Method related charge
� Sample BOQ in Method Related Charge� Sample BOQ in Method Related Charge
Activity / ResourceFixed
charge
Time-related
chargeUnit Price
Establish site
Site overheads
Bulldozers
Excavators
General overheads
-----------------
-----------------
Fixed
-
-
-
-
-
-
-
Time-related
Time-related
Time-related
Time-related
-
-
Sum
Month
Day
Day
Month
-
-
31
ITEM DESCRIPTION QUANTITY UNITUNIT PRICE
TOTAL PRICE
1
Heath Safety Equipment and Monitoring.
Lump Sum
Project Site Mobilization.
Lump Sum
2Steel Structure Decontamination.
a) Decontaminate steel structure
1100SquareMeters
b) Load and haul debris to Landfill in Alexandria
5 Ton
3Walls Decontamination and Coating.
a) Support walls 1200Square Meters
b) Rolling Scaffold 1200SquareMeters